A risk-on tone developed in early Asia trading; NZD has trended higher and is currently up 0.7% to 0.7320; UST 10-year rate is currently up 1bp for the day at 2.79%

By Jason Wong

Market sentiment began the week on a positive note, seeing a rebound in US equities, a nudge higher in UST yields and the NZD outperform, while the USD is weaker across the board.

A risk-on tone developed in early Asia trading following US Treasury Mnuchin’s weekend comments that tried to unwind his view on Friday of potential for a US-China “trade war”.  Reports also emerged that North Korea told the US that Kim Jong Un is prepared to discuss the denuclearisation of the Korean Peninsula, clearing the way for a summit meeting between the two countries.  In news overnight, President Trump said he expects to meet with Kim Jong Un in May or early June, and expressed hope they’d reach a deal on “de-nuking” the Korean peninsula.

S&P futures rose during the Asian session and the S&P500 opened stronger and has trended higher throughout the session, now up 1½% and on its way to unwinding the 2% fall on Friday. The NZD has trended higher alongside that move and is currently up 0.7% to 0.7320, the best of the majors.  The NZD is higher on all the crosses, but to a more modest degree.  NZD/AUD is back to 0.95, after earlier reaching a fresh 9-month high of 0.9519.  We expect resistance to gradually build for this cross at these levels and over recent years the air above 0.96 has been thin.  CFTC data show building net NZD long positions and while net AUD positions have turned short.  The NZD is now vulnerable to the downside on any fresh negative news.

In late Asia trading yesterday, Bloomberg reported that China is evaluating the potential impact of a gradual CNY depreciation, partly as a tool in trade negotiations and partly to counter the impact of any trade sanctions that knock China exports.  Market commentary in response to this news is that it would be a risky strategy from China. The market spasms that followed the devaluation of CNY in 2015 is still fresh in the mind alongside the massive capital outflows that followed that eventually led to increased capital controls. A more subtle move than manipulating the currency lower would be for China to loosen capital controls and let local residents gradually take money out.  Traders pushed CNH forward points lower across the curve on Monday, a sign that investors are still trimming expectations of yuan depreciation during the next 12 months. Today President Xi Jinping is due to give a keynote speech in Asia at an economic forum and the market will be taking a greater interest to see what he says about the US-China trade dispute.

In other news, the ECB annual report gave EUR a kick up as the underlying message was positive.   The strong economic expansion is expected to continue in 2018 and, despite uncertainties, policy makers are confident that inflation will converge toward medium-term goals.  This seemed to alleviate concerns that trade wars will disrupt ECB plans to pare back stimulus in due course.

The US Congressional Budget Office released a fresh set of forecasts that account for the latest tax cuts and spending plans.  The budget deficit is projected to be $804b in FY 2018 (prev. 563b) while the deficit will breach the $1000b mark in FY 2020, two years earlier than previously projected.  There was no market reaction to the news, with the rising US twin deficits a well acknowledged problem and this has been factor behind USD weakness since late last year when Trump’s tax cuts looked likely to pass.

There isn’t much to say about the rates market, with the US 10-year Treasury rate rising to as high as 2.81% and is currently up just 1bp for the day at 2.79%, with improved risk appetite imparting a modest upside bias to yields.   The NZ swaps curve was little changed yesterday, while bond yields were slightly lower following Friday night’s US price action.

On the economic calendar this morning the NZ QSBO should continue to show tight capacity pressures and therefore a bias towards greater inflationary pressure ahead.  Global releases are second-tier and should cause little market reaction.


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